Why Bounced Checks are Hard to Handle

The overwhelming majority of the checks bank customers write clear without a hitch. Of the more than 36 billion checks banks process each year, just one-half of one percent bounce. And the number of bounced checks has declined at an annual rate of 7.7 percent since 2000.

There are a number of reasons for the decline in bounced checks (referred to also as “overdrafts”). Access to account balance and history via phone, Internet, and ATM has created more accurately and rapidly informed customers. Computer programs that streamline the process of balancing and finding mistakes have also been a factor. But more than anything, it’s been the rising fees associated with overdrafts that have slowed their occurrences. 

Unpaid overdrafts are a liability for banks. In fact, the second most common type of check fraud is from overdrafts that the bank covers but bank customers never repay. Banks generally charge penalties ranging from $17 to $35 to discourage customers from writing bad checks. The fees for overdrawing an account are like parking tickets – they are meant to be a deterrent.  

But even more than the bank, it’s the account holder writing the rubber checks that suffers the most. Banks use a variety of methods to process and post checks, and are authorized to process checks in any order that they deem most expedient. Each bank may have a different standard or policy regarding the order in which it posts checks and other checking account transactions. The stakes tend to be higher for consumers’ larger check amounts, such as with mortgage or rent payments. That’s why many banks use the high-to-low method of check processing, where each day the largest transactions are processed first and the smallest last. This may result in several overdrafts being generated by low amount checks that cannot be paid once a large check is paid…and each overdraft carries with it a separate charge, which further lowers the account balance. 

Keeping accurate, up-to-date records of transactions and reconciling accounts as soon as statements are available are the best ways to avoid bounced checks. Remember that not all transactions are processed in real time. Consumers should be aware that deposit transactions (checks, ATM, debit and credit card) may be posted to an account at different times.

Relying on “float” (the time it takes for a check to clear) was never a good idea and is all but obsolete now. The increasingly automated nature of today’s processing systems often reduce the time from purchase to posting down to a matter of hours.

You may want to add overdraft protection to your account as another layer of protection. The bank will generally cover your overdrafts with a temporary “loan” that carries with it a reasonable fee/interest structure, and do not carry the negative connotation a simple overdraft does.